It’s been more than four decades since the Hindenburg disaster slammed the brakes on the era of hydrogen-fueled dirigibles. But nature’s lightest element continues to capture the world’s imagination as a clean, plentiful and potentially cheap energy source.
Hydrogen’s current burst of popularity is the result of global action to combat climate change. Solar panels, wind turbines, batteries and electric vehicles can provide carbon emissions-free sources for generating electricity and fueling most transport. But they’re not close to powering furnaces hot enough for major industrial processes like manufacturing steel.
Hydrogen also offers a potential emission
s-free solution for running household appliances, such as providing natural gas-level heat for cooking and furnaces. And hydrogen fuel cells have potential to move heavy industrial equipment, trucking fleets and ships at a competitive cost as well.
The key questions for investors are:
- Can the cost of hydrogen be reduced enough to match up to fossil fuels, how will that take and what’s the risk competing technology will derail its rise, as has happened with every previous cycle of hydrogen hype?
- What companies potentially benefiting from hydrogen development can be purchased now at good entry points?
Virtually all hydrogen currently used now is considered \gray,\ meaning it’s extracted from natural gas. Turning it \blue\ requires infrastructure to capture the greenhouse gasses emitted in that process. In contrast, \green\ hydrogen is produced emissions-free by electrolysis, with electric current sent through water to separate hydrogen from oxygen.
The challenge for all three is cost, especially for green hydrogen. According to Bloomberg New Energy Finance data, green hydrogen costs from $1.84 to $10.09 a kilogram to make now. That would have to fall to a range of at least $1 to $2 a kilogram just to be competitive with blue hydrogen, and much further still to match up with conventional energy.
Water is the only raw material needed to manufacture green hydrogen. So the Holy Grail is making the process itself economic. The most important element of that is securing sufficient, low-cost sources of electricity, followed closely by developing infrastructure to handle and integrate hydrogen with existing systems, including appliances.
The efforts to get there are underway. Earlier this month, Chinese energy giant Sinopec began construction on the world’s largest green hydrogen production plant announced to date: A facility with 260 megawatts of electrolyzer capacity expected to enter service by mid-2023, at a projected cost of $470 million.
The plant is projected to have a 48.8 percent annual utilization rate. Nearly half the needed electricity to run it will come from a 300 MW solar facility, with the rest from nearby wind farms. And it includes a hydrogen transportation pipeline with takeaway capacity of 2.5 tons per hour.
The CEO of Italian power company Snam SpA (SRG, SNMRY) has written a book entitled \The Hydrogen Revolution,\ in which he projects green hydrogen costs will be competitive within five years with fossil fuels. That likely depends on offshore wind hitting projections of an 11-fold lift in global capacity to 400 gigawatts by 2035.
As for transportation and integration, oil and gas midstream and natural gas distribution companies, including Southwest Gas (SWX) in the US southwest, are testing blending hydrogen in existing infrastructure with already promising results. And British super major oil BP Plc (BP) last month announced plans for an electrolysis hub to provide hydrogen fuel for trucks and other forms of heavy transport starting in 2025, with an anticipated production capacity of 1.5 gigawatts by 2030.
The UK government has set a target of 5 GW of hydrogen production capacity by 2030 to cut the transport’s sector’s 29.8 percent share of the country’s CO2 emissions. If it succeeds, the plan would overcome hydrogen’s biggest current disadvantage versus increased use of batteries, which is a lack of infrastructure. And hydrogen-powered trucks can be fueled far more quickly with much wider range than vehicles running purely on electricity.
Bottom line: We’re still years from anything resembling a hydrogen economy. But development is nonetheless real in several areas. And it’s not hard to envision potential beneficiaries.
Ironically, at the same time we’re seeing increasingly bullish developments for hydrogen, the stocks investors currently consider bets on the trend are sinking deeper into the red for 2021. I see two major reasons for that.
First, the vast majority of these companies are still years from turning a profit. In fact, several of the most hyped are bleeding massive amounts of cash. That includes Plug Power (NSDQ: PLUG), a fuel cell company with a huge market cap of over $17 billion and included in 153 separate stock indexes and associated ETFs.
The company has some promising ventures, including one announced this month with South Korea’s Edison Motors to produce hydrogen-powered buses. But it also projects negative free cash flow this year of nearly $700 million, and almost $1 billion for next year. And Plug shares currently trade at barely one-third their January peak.
Bottom line: The best decision investors could have made this year on so-called pure play fuel cell/hydrogen stocks was to avoid them entirely. Like makers of solar panels and batteries, these companies are basically in a race to the bottom to increase efficiency of processes and reduce costs. The winners will reap the spoils of a massive new market. But there’s no guarantee any of the stocks investors are now betting on will survive to see it.
Don’t look for ETFs to cut risk. The number available has grown along with hydrogen hype. The Defiance Next Gen H2 ETF (HDRO)) has about $66 million in net asset value. Global X Hydrogen ETF (HYDR) is a bit smaller at $27 million. And Direxion Hydrogen ETF (HJEN) has $44 million.
Collectively, they’re down an average of about 20 percent this year. The Direxion fund is heavy on Asian companies, while the other two focus on the US and Europe. But the primary differentiator of performance appears to be when they were launched—as what they hold has been a continual decline in 2021.
Fortunately, there’s a much lower risk way to bet on hydrogen. In fact, the most promising players already have secure and growing earnings, and many pay generous and growing dividends as well.
Basically, they’re the same companies that today dominate \conventional\ energy now. At the top of the list are the super major oils, which today are deploying windfall profits from oil and gas sales to launch hydrogen and carbon capture development.
Also up there are leading utilities and electricity generators. They’ll enjoy a massive potential new source of contracted and/or regulated power sales, magnified by the fact that energy needed for electrolysis is much greater than what’s in the hydrogen produced.
Not only do these companies have the scale and financial power to dominate hydrogen as they have energy in general the past century plus. But if the hydrogen dream is again derailed by inability to bring down costs enough, they’ll still prosper and reward investors with rising share prices and dividends.
That’s having your cake and eating it too, and without the risk of it being taken away by myriad factors that affect the earnings-less like Plug. Look for more on no-hype hydrogen in the upcoming January issue of Conrad’s Utility Investor.